Characterizing Behavioral Decisions with Choice Data∗

A number of different models with behavioral economics have a reduced form representation where potentially boundedly rational decision-makers do not necessarily internalize all the consequences of their actions on payoff relevant features (which we label as psychological states) of the choice environment. This paper studies the restrictions that such behavioral models impose on choice data and the implications they have for welfare analysis. First, we propose a welfare benchmark that is justified using standard axioms of rational choice and can be applied to a number of existing seminal behavioral economics models. Second, we show that Sen’s axioms α and γ fully characterize choice data consistent with behavioral decision-makers. Third, we show how choice data to infer information about the normative significance of psychological states and establish the possibility of identifying welfare dominated choices. JEL: D03, D60, I30.